Seth’s Blog on Finance

The Quality of Independence

Candidates for Presidential Elections 2011

Another election is upon us and Singapore votes for its third elected President. This time around, Singaporeans get to choose between four different candidates, all of whom seem to stress on how independent he is.

Why the emphasis on “independence”?

Independence signifies one’s impartiality and objectivity. These qualities are important for our next President. Likewise, the degree of independence of a financial adviser also directly impacts the person who is engaging the financial adviser. The value of unbiased advice cannot be overstated in constructing a good and proper financial portfolio.

Clashes of interests

However, I have come across some people who are sceptical of Independent Financial Advisers (IFA), thinking that they do not offer true objective advice. This is due to several reasons, namely the fact that most IFA representatives are still remunerated by commissions, and that they cannot distribute every insurer’s products.

These are indeed clashes of interests, as I have written about before. The fact of the matter is that the Independent platform is the only one that greatly reduces such clashes of interests. While I agree that the Independent platform has room for improvement – and indeed has been improving over the decade since it was introduced in Singapore – we must look at it in relative terms over other distribution channels. Banks and non-independent financial adviser firms are able to cut special deals with insurer that create bias advice, and tied representatives of insurers can only provide solutions their principal company offers, regardless of the quality and suitability of such solutions.

Any IFA firm will be happy to carry products from every insurer to ensure as complete a product range as possible to ensure the most objective advice. While this is true in the UK because the demand for independent advice has made IFAs the top distribution channel there, leaving insurers little choice but to distribute through them, IFAs are still relatively new here and tied agencies still hold a large (though declining) share of the market. This enables some companies (mainly two, actually) to be able to rely on their large sales-forces to loyally sell their products. To me, this suggests the non-competitiveness of their products, and comparisons can be made to ascertain this opinion of mine. An insurer with good products have nothing to lose by putting them up for distribution through IFAs for comparison and scrutiny if the products are indeed competitive.

In any case, undermining the independence of IFAs due to the slight incomplete representation of the life insurance market is perhaps conflating financial planning with just life insurance. Other financial solutions such as health insurance, personal general insurance, collective investment schemes, mortgage refinancing etc. are all part of ensuring that one’s financial portfolio is duly taken care of. IFAs again offer an independent range of such solutions more so than any other distribution channel claiming to offer financial advice to consumers.

The capacity to give good advice

Perhaps the single greatest reason that people think little of IFAs is due to the fact that there are IFAs who offer bad advice. I completely agree with this, as I have mentioned before that independence alone is not enough. To illustrate:

Both tied agents and IFAs can give lousy advice. An incompetent and/or unethical IFA representative can do as much damage to one’s portfolio as an incompetent and/or unethical tied agent. However, the capacity of giving good advice is much larger for IFAs. An IFA representative who is concerned about the interests of his clients and has proper training and competency is able to deliver good advice and execute proper solutions for his clients. Tied agents, on the other hand, have a serious bottleneck to their ability to deliver good solutions which is the product restrictions they face. Some are worse than others as their principal company offer overpriced and ineffective products. If you are dealing with an agent from Company A, you may get “okay” advice at best, and get solutions that are not the best, but may not cause much damage to your financial portfolio. If you deal with an agent from Company B, it may well be that whatever solution you execute is subpar, even damaging, due to the nature of the products the company offers.

As with our President, we all do have a choice on how we want our financial services industry to be. Practitioners can choose to move out of a restrictive and client-unfriendly distribution model to a better one, as I did. Consumers themselves can demand better advice and solutions. The system will evolve and progress to where there is demand. The remaining insurers who are able to rely on their exclusive sales-forces today will find it hard not to distribute through IFAs in future, in the process being forced to improve on the competitiveness of their products. Consumers should “vote” with their wallets if they truly want the most objective advice for their own benefit.